Measuring price gains, inflationary or not
Inflation is not a one-way street to recession. So long as consumers, organizations and governments are receiving income, rising prices are a backdrop to life – not a brick wall.
That reality is now functioning in the stock market. The proof is in the positive reaction to the latest GDP report, showing a second quarterly drop. Gone is last quarter’s angst about two quarters signaling a recession. Excellent examples of the positive side exist in the components of the GDP. For example, in exports.
Exports show the benefit from inflation
U.S. exports are included in U.S. GDP because the goods and services are U.S. produced. (And that’s why imports are not.)
Following the early 2020 shutdown, there was a large export rebound through early 2021. Since then, exports growth has run steadily at a year-over-year 20% rate. However, BEA (U.S. Bureau of Economic Analysis), responsible for the GDP, virtually excludes any actual data analysis and even a basic data presentation. Look in the full July 28 report, and the only unadjusted, “current dollar” GDP data is in the last table, “Appendix Table B,” on the next to last line under “Addenda.” Fortunately, the Federal Reserve Bank of St Louis offers all the raw (actual, nominal) data through its FRED data system.
Instead, BEA focuses on seasonally-adjusted, annualized quarterly amounts that they then inflation-adjust. Percentage changes for these amounts are then annualized. All of this may seem academically proper for comparing quarterly numbers in normal times. However, abnormality has been the state of affairs for the past six quarters. To show how silly their adjustments can become, the dramatic drop in exports in 2nd quarter 2020 as everything shut down was made worse by BEA’s seasonal adjustment because 2nd quarters are normally good export periods. Moreover, the price drops during the quarter improved the exports decline (inflation-adjustment in reverse).
So, let’s see what actually happened to the “current dollar,” unadjusted exports in the 2nd quarter of 2022:
Quarter exports: $746 B
One quarter change from 1st quarter 2022 = $ +77 B +11.6% (BEA’s seasonally-adjusted, inflation-adjusted change = +4.2%)
One year change from 2nd quarter 2021 = $ +131 B +21.3% (BEA’s adjusted change = +6.8%)
Why the large differences?
The primary reason is the large price rises in exports. So, why do exports need to be reduced by the price gains? Good question.
The argument for reducing U.S. consumer sales is to see what “real” growth is. Think of the adjustment as a conversion from dollar sales to unit sales – like an auto manufacturer would do. The reasoning is that if consumers spending rises by 5%, but prices rise by 4%, consumers are only increasing the items they buy by about 1%.
Okay, that’s fine for U.S. consumers. But what about non-U.S. buyers of U.S. exports. Should we really reduce by price increases? After all, if U.S. businesses are able to charge a higher price, isn’t that a good thing – a real increase in the valuation of goods by foreign buyers?
That thought process brings us to a larger question…
When prices move abnormally, how should price adjustments be calculated?
Think about vehicle sales and chip shortages. We know that the recent price increases reflected normal demand meeting reduced supply. But, then, that means price decreases are coming when supply returns. So, why decrease sales now and increase them later simply because of a supply hiccup?
No data to make such a normalized adjustment? Yes, you’ve hit it. We live in a time of trusting only objective digital data. No subjective analog rationale allowed. So, artificial non-intelligence churns out dumb results that get reported and taken as gospel. Worse, we are confronted with serious-sounding, simplistic rules (no thinking needed). A good example is that two-negative-quarter GDP recession signal.
The bottom line: So, what’s to be done?
Unfortunately, it means we need to do the heavy lifting. Either that or hunt for others who are doing the work. It’s a difficult time for investors to find sound information and thorough analysis. Small wonder that so many rely on index funds.
